On Tuesday, Jefferies adjusted its stance on Big Yellow Group Plc (LON:BYG:LN) (OTC: BYLOF), moving the rating from "Buy" to "Hold" and setting a new price target of £12.24, reduced from the previous £13.59. The revision comes amid a broader reassessment of property trusts, influenced by a sector-wide increase in the weighted average cost of capital (WACC) by 190 basis points to 10% year-to-date.
The firm noted that average real estate returns have been modest at 3% year-over-year, with specific sectors such as offices experiencing a 5% decline, while retail and industrial have seen gains of 5% and 6%, respectively, according to MSCI All Property indices. This performance has led to negative Economic Value Added (EVA) across the sector, suggesting that current valuations do not contribute to shareholder value above the cost of capital.
Jefferies anticipates that real estate investment trusts (REITs) will continue to face valuation discounts as equity markets adjust net asset values (NAVs) that are based on historical data. The report highlighted that REITs are currently scrutinized under the 'macroscope', with macroeconomic factors playing a more significant role in their valuation than internal factors such as rental income.
The self-storage sector, in which Big Yellow (OTC:YELLQ) operates, is closely linked to the housing market turnover. Given that the housing market has been subdued, the outlook for the sector remains cautious. Jefferies also pointed out that the self-storage sector is dealing with high overhead costs. With recent changes to National Insurance Contributions (NIC (NASDAQ:EGOV)), the firm expects that earnings and dividend growth could be constrained. This comes despite the shares having increased by 17% year-over-year.
In summary, the downgrade reflects a cautious outlook for real estate returns, influenced by macroeconomic factors and sector-specific challenges, including subdued market turnover and increasing overheads.
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